Deal Diligence: complete guide

The financial layer of a deal diligence is usually the first one reviewed, but it should never stop at reading a balance sheet. The real work is to understand whether the reported performance is sustainable and whether it actually converts into cash. Several questions sit at the centre of this analysis: is the result clean, or boosted by exceptional items? Are there personal or non-recurring charges that need to be restated? Are inventories and receivables healthy? And does the activity rely too heavily on the owner?

Normalized EBITDA is where most of the disagreement happens. A seller will often present an adjusted figure that strips out costs deemed exceptional or owner-specific. Some of those adjustments are legitimate, but each one has to be credible and documented. In our files, a recurring pattern is an EBITDA that looks flattering on paper but does not translate into available cash. When reported profitability and treasury diverge, you need to understand why before you accept the number as a basis for valuation. A margin that is presented as slightly too clean deserves the same scrutiny as an obvious loss.

Working capital is the second pressure point. The level of working capital requirement, its seasonality and its quality all feed directly into the price. This is precisely why diligence findings should drive the working capital target negotiated in the agreement, and why a revision of the normative working capital is one of the standard outcomes of a serious review. Alongside it, net financial debt has to be measured properly, because an adjustment to net debt is one of the most common ways diligence findings reshape the headline price.

Beyond these, a financial review looks at revenue quality, customer concentration, gross margin, non-recurring charges, the quality of the EBITDA to cash conversion, and the real capital expenditure the business needs to keep running. The goal is not to admire the accounts. It is to separate recurring, defensible performance from anything that will not survive the change of ownership.

Tax is a classic source of unpleasant surprises. A proper review covers VAT, corporate income tax, various other taxes, any audits in progress, sensitive tax positions, transfer pricing where relevant, tax credits, the group regime, and the risk that certain transactions could be requalified. A business that is poorly organised on its invoicing or VAT flows can carry more risk than its latest accounts would suggest. In 2026 this matters even more: the spread of digital flows and the ramp-up of electronic invoicing make the consistency of tax data a real diligence subject in its own right. Late VAT, recurring discrepancies or incomplete documentation are not administrative details. They can reveal a genuine exposure that has to be priced or covered.

The social and payroll dimension is frequently underestimated, yet it can wipe out value quickly. Employment contracts, variable pay, labour litigation, social charges, working time, benefits in kind, the use of subcontractors or independents, and dependence on a few key profiles all need to be examined. A target can look profitable and then lose value sharply if disputes emerge, if variable pay was never properly modelled or provisioned, if key talent leaves at closing, or if the real organisation rests on informal arrangements that no contract reflects. Subcontractors who function as near-employees belong on this list as well, because they carry requalification risk.

The legal review protects against structural surprises. It covers the articles of association, shareholder agreements, commercial contracts, leases, intellectual property, litigation, existing guarantees, governance and any regulatory authorisations. Its purpose is to make sure that nothing in the legal architecture of the target will undermine the deal after signing.

The operational layer is the one most often skipped, especially in smaller transactions, and that is a mistake. It is essential to understand how the company actually makes money, whether its processes are robust, whether the model can scale, whether the information system holds up, whether dependence on a handful of people is critical, and whether the announced synergies are realistic. A diligence that ignores operations describes the past without testing whether the business can deliver the future the price assumes.

A good diligence does not stop at listing risks. It has to feed the negotiation, because findings that never reach the agreement create no protection. The link between what the review uncovers and how the deal is structured is where most of the value is captured.

On price, the findings can justify a reduction, an adjustment to net debt, a revision of the normative working capital, or a phased payment rather than a single sum at closing. On warranties, any grey areas that remain after the review should be handled in the legal documentation through liability guarantees, seller representations, specific clauses and retention mechanisms. The principle is simple: if a risk cannot be fully resolved before signing, it should be allocated explicitly in the contract rather than left to chance.

The earn-out deserves particular care. When future profitability still depends on the seller, or on parameters that remain uncertain, a well-structured earn-out can realign the interests of both sides. But it only works if it rests on measurable indicators and on a clean financial base. An earn-out built on a contested EBITDA simply moves the disagreement to a later date. This is one more reason why the normalisation work done during diligence matters well beyond the price discussion.

The practical case in the French version illustrates the chain clearly. A buyer studies a digital agency presented with strong growth, high recurrence, a stable team and very clean profitability. The review tells a different story: a meaningful share of revenue depends on two clients, part of the EBITDA comes from a temporary and non-durable drop in subcontracting, several variable bonuses were not correctly modelled, the VAT treatment of certain international transactions was approximate, and the selling owner remains the main commercial entry point. None of these is fatal on its own. Together they change the deal, and they translate directly into a renegotiated price, an adjusted working capital target, a planned earn-out, stronger liability guarantees and a supported commercial transition. Without diligence, the buyer would have paid on the basis of overstated profitability.

A well-run diligence mission generally follows five steps. It starts with scoping, where the type of deal, the timetable, the risk areas and the expected depth of work are defined. It moves to document collection, as the data room is opened and then structured. The analysis phase reviews the figures, the flows, the contracts, the liabilities, the dependencies and any inconsistencies. A question-and-answer phase and management meetings allow open points to be consolidated and discussed directly with the management team. The mission ends with a report and negotiation support, and the true deliverable is not a theoretical document but a tool that helps you decide, renegotiate, secure the operation or, if necessary, walk away.

The quality of the data room shapes everything. A good data room is not there to impress; it exists to smooth the deal and reduce blind spots. On the financial side it should hold the annual accounts, interim situations, the general ledger and trial balances where needed, the detail of financial debt, receivables and payables, the business plan, the budget, capital expenditure and treasury schedules. The tax, social, legal and commercial files should be just as complete, from tax returns and VAT filings to the personnel register, key contracts, the organisation chart, the articles, the company registration extract, shareholder agreements, leases, major contracts and intellectual property documents.

Diligence is not only for the buyer. A vendor due diligence, or at minimum a genuine pre-sale audit, is often an excellent investment and a strategy that remains under-used. By running the review before the buyer does, a seller can identify anomalies first, correct the actionable issues, defend the valuation more effectively, avoid last-minute price reductions and accelerate the timetable. For a selling owner, this is often the difference between a process that is controlled and a deal that is simply endured.

Finally, the value of a diligence is realised after closing as much as before it. Many buyers believe the work stops at signing, but the report should serve as an operational roadmap for the first hundred days. Cash priorities, sensitive HR matters, tax or contractual workstreams and governance all need to be addressed quickly. A useful diligence does not only describe the risks. It helps prioritise the actions that protect the return on investment once the deal is done.

A light review process does not simply fail to add value; it actively exposes the buyer to loss in three distinct ways. First, you overpay for an asset you never fully understood, because the price was anchored to a profitability that does not hold once the accounts are properly read. Second, you discover a tax, social or legal exposure far too late, once it can no longer be priced into the deal or covered by a warranty. Third, you negotiate blind, missing the levers that would have let you structure the operation more intelligently. Each of these failures is avoidable, and avoiding them is the entire purpose of the exercise.

The real function of diligence is to turn an intuition into an informed decision. A founder may have an excellent feel for the business and still rely on a process that is too thin to support a commitment of this size. Good diligence forces the conversation onto concrete ground and answers the questions that actually determine value. Is the revenue recurring or fragile? Are the margins sustainable over time, or flattered by a passing effect? Is the treasury shown on the balance sheet genuinely available, or already committed? Are the normalized EBITDA figures credible, or built on adjustments no buyer should accept? Are the key contracts secured, and are the key employees likely to stay through and beyond the closing? When you can answer these with evidence rather than hope, you are no longer making a bet. You are making a decision.

The value of a diligence report depends less on its length than on its connection to the field. A standardised document, detached from how the business actually operates, helps no one decide. Our approach links the economic reality of the company, the reading of the accounts, the tax and social risks, the quality of the underlying data, and the concrete consequences for the negotiation. In practice that means a financial analysis oriented toward the decision, a pragmatic reading of tax matters, sustained attention to cash and working capital, and a review of the digital tools and flows that increasingly shape data reliability.

This is where a hybrid method earns its place. A strong human reading of the deal, combined with capable digital tools, lets the team exploit the documentation, the exports, the reconciliations and the scenarios quickly, without losing the judgement that no tool replaces. Just as important, the accounting work does not happen in isolation. Coordination with the lawyers and the other advisors involved ensures that what the review uncovers is translated into the legal documentation and the structuring choices, rather than sitting unused in a report. A finding that never reaches the agreement protects nobody, which is why the connection between the analysis and the rest of the advisory team is part of the work itself.

Both are complementary. The accountant performs financial and tax due diligence (account analysis, EBITDA normalization, tax review). The M&A advisor structures the overall process, drafts the letter of intent and negotiates conditions. For SMEs, a specialized accounting firm can often cover both aspects.